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Author: JimLuckett Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76418  
Subject: Re: WSJ: Longevity Insurance Date: 11/11/2011 9:53 PM
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I'd like to revive and continue this old thread.

Despite the fact that interest rates have gone down and therefore the return on longevity insurance is now less, I still like the idea.

I have just gotten quotes for myself at age 62 (male). For every dollar I give them, they will give me 57 cents per year starting at age 85. So, a 57% annual return and the only catch is you have to wait 23 years to start getting it and it stops when you die. Since I plan to live forever, this is very attractive. If I buy $10,000 worth, by age 95 I will have gotten $57,000 back. Not bad for a fixed, guaranteed investment. If I buy $100,000 worth, I'll have over half a million coming back by age 95.

What I particularly like about it is having longevity insurance would free me up to be a little more aggressive with the rest of my retirement funds because I'll know I've got this kicking in at age 85 to bail me out if investment returns have been poor.

Living long is an unlikely event with challenging financial consequences, like a house fire, a car accident or a health emergency. We typically provide for such contingencies with insurance rather than with saving and investment because it's so costly to set aside funds to replace your house, replace your car and pay for a triple bypass when you may never have these expenses. Insurance is a long-shot, big- payoff investment that is perfectly correlated with a certain type of sudden need for more money. Usually we think of such sudden needs as misfortunes, so it's a little mind-bending to think about insuring against a good thing -- long life -- but it makes sense.

Some critics might say an index fund will probably outperform longevity insurance. True. But the key word there is probably. The average return on insurance is low to negative, but we still buy it because of the feature of a big payoff that is perfectly correlated with a sudden personal need for a financial windfall. Living unusually long is like a house fire and covering it with insurance rather than conventional investment is efficient. And it pays off with greater certainty than an index fund.

I also like the psychological aspect of having something to look forward to on the way to 85, and then enjoying that I'm beating the insurance company more and more for every year I keep living beyond 85. You could look forward to cashing in your index fund, but you could also worry about it, and that's not fun when you're 75.

The companies that offer it (MetLife, New York Life, Symetra, Hartford, and one other I can't recall -- maybe it was the Dept. of Energy -- ) are all very robust financially. In addition, annuities are guaranteed by a guarantee fund in every state or almost every state (check yours for limits, terms, etc.). Regulators watch insurance company reserve levels and if they fall below required levels, close the company and transfer the reserves and the liabilities to another company which continues to pay the contracts and policies. I have read that no one in this country has ever failed to get an annuity paymeent due them as a result of company insolvency. Also, you can diversify with contracts from several different companies.

I think you would call longevity insurance a fixed deferred life annuity. I think if you just say fixed deferred annuity, people think you are talking about one that pays a lump sum at a future date (how this is an annuity I don't know) which is mostly a tax dodge -- excuse me, strategy. For example, Berkshire Hathaway will quote you terms on fixed deferred annuity right on their website, but it's a one-time payoff. And if you try to build your own longevity insurance by pairing this product with an intention to take the lump sum and then buy an immediate fixed life annuity, you'll see the return is far less. Berkshire doesn't offer longevity insurance. The most they will let you defer the start of a life annuity is 13 months.

Inflation must of course be taken into account in sizing your purchase of longevity insurance. In thinking about how much you might want to be receiving at age 85, double or triple it to cover inflation.

And of course, don't lock up so much in your purchase of longevity insurance that you leave yourself too poor to enjoy your sub-85 years. I am thinking of devoting something like 3% of my total retirement pile. It's amazing how much that small amount brightens some of the retirement scenarios I am looking at, thanks to the huge rate of return. (Huge only because most people who buy it will not live long enough to make a positive return on it, just as most people lose on their fire insurance).

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